On the intensity of downside risk aversion

Abstract

The degree of downside risk aversion (or equivalently prudence) is so far usually measured by $\frac{-U^{\prime \prime \prime }}{U^{\prime \prime }}$ . We propose here another measure, $\frac{U^{\prime \prime \prime }}{U^{\prime }}$ , which has specific and interesting local and global properties. Some of these properties are to a wide extent similar to those of the classical measure of absolute risk aversion, which is not always the case for $\frac{ -U^{\prime \prime \prime }}{U^{\prime \prime }}$ . It also appears that the two measures are not mutually exclusive. Instead, they seem to be rather complementary as shown through an economic application dealing with a simple general equilibrium model of savings.